The infrastructure market in the Middle East and North Africa (MENA) region has, in recent years, been one of the most dynamic in the world and is currently going through massive political, regulatory, social and technological change. Underlying these changes is the challenge of a growing population – in excess of 7 percent between 2010 and 20152 – and the surge in demand for electricity this brings.
Yet investment in new generation capacity has so far been limited and, in some countries, there is also limited or no supply of local hydrocarbon resources. To address this challenge, many MENA governments have been planning an energy transition to meet demand. Ambitious targets have been set with a strong focus on renewable energy and offshore hydrocarbon development. Other mega-projects are connected to grid-interconnection and regional pipelines.
New electricity generation, transmission and distribution infrastructure will require huge capital expenditure from private investors. But geopolitical, security and economic issues facing the region will have enormous influence on how quickly and successfully that energy transition occurs and importantly on how easy it is to attract the required capital from investors to facilitate the transition.
The Arab Spring in 2010-2011 and the ongoing war against Islamist militants has, and will likely continue to interrupt production and trade as governments, perhaps understandably, shift their attention to security and away from trade and commerce. This is having a negative impact on the region’s ability to build the sustainable energy and the infrastructure needed to meet capacity demands. Many essential infrastructure projects have suffered delays, such as the Egypt-Saudi underwater grid-interconnection and the Iraq-Jordan Gas Pipeline, and others have been completely derailed, such as the Arab Gas Pipeline which transported Egyptian gas to the North.
However, positive developments are happening in spite of these challenges. Regulatory reforms, critical to achieving energy transition targets, are being implemented and projects with a strong rationale that satisfy all stakeholders do see the light of day – see Figure 23.1 for some of the major projects in the region. The Egyptian Refinery Company is an example of a project that has fought many setbacks to reach financial close; it is one of the largest mega-projects in Egypt, with the New Suez Canal, currently under construction. And there has been the delivery of a few projects in Jordan and Morocco, and other promising announcements in Egypt.
JORDAN AND EGYPT
Jordan lacks the natural energy resources of its neighbours, and therefore imports about 97 percent of fuel for its domestic power needs and was, as a result, arguably one of the beneficiaries of the recent oil slump.
Jordan’s energy mix effectively started shifting away from oil and oil products and towards natural gas around 2002, and the development of the Arab Gas Pipeline (AGP) was critical to that shift as it became the largest source of energy transportation for around a decade. The shift towards natural gas reversed course as unrest in Egypt, beginning in 2011, led to numerous disruptions on the pipeline, and oil and oil product imports replaced lost volumes from the AGP. Since March 2012, AGP is out of order because of attacks on a feeder pipeline to el-Arish. More than 10 attacks have occurred since the beginning of the 2011 Egyptian protests. The Jordanian Department of Statistics reported in April 2013 that more than 30 percent of the country’s total import bill in 2012 was for energy products.
As part of efforts to increase energy independence and cut a rising fuel bill – $1 billion per year – the Kingdom has turned to alternative energy to alleviate the problem by launching a renewable energy programme in utility-scale wind and solar as well as opening the decentralised solar market to residential and commercial markets. Whereas the LNG terminal in Aqaba is close to completion, other major projects in connection with gas transportation such as the Leviathan project or the Iraqi gas pipeline projects are in development.
The Jordan Iraq pipeline is another mega-project that can also solve part of the energy problem and rebalance energy sources. If constructed, the pipeline project would send Iraqi oil to the Red Sea over 1,680km. In April 2013, Jordan and Iraq signed an $18 billion agreement to build a pipeline that will supply Jordan with crude oil and natural gas. If constructed it would carry from Basra to Aqaba Port one-million barrels of oil a day and around 260 million cubic feet of gas out of which a small part will be used in Jordan and with the rest exported through Aqaba, generating an estimated $3 billion-a-year in revenues for Jordan.
The discoveries of major natural gas fields in the east of the Mediterranean — Leviathan and Tamar fields — benefit from a strategic location between major oil suppliers such as the Gulf Cooperation Council countries and demand markets such as Europe, and makes the case to transform the eastern Mediterranean into an energy transit hub. Egypt’s proven gas reserves were estimated at 2.2tcn in 2011, representing the third- largest reserves in Africa after Nigeria and Algeria. Most of these reserves are located in the Mediterranean area and in the Western Desert.
Egypt disclosed having signed a number of deals with energy companies during the ‘Egypt the Future’ conference in the Red Sea resort of Sharm El Sheikh, which took place in March 2015. This conference was intended to act as launch pad for the economy after four years of political and economic disarray. Egypt and international companies announced plans for billions of dollars worth of investments in energy at that occasion and the bulk of the announcements were in upstream natural gas production and power generation.
There are also proposals in development and negotiations to build international oil and natural gas pipelines, LNG liquefaction plants, and petroleum terminals to solve the energy equation. The potential economic gains from energy exports are enticing, but there are outstanding issues that threaten to undermine progress towards that outcome. Moving from the discovery phase to design phase to the commercial production phase and, from there, to develop exporting capability requires ongoing commitment in the face of several regional issues, including both security and economic challenges, but needs before anything else political commitment.
THE CASE FOR RENEWABLES
MENA has an abundance of all the natural resources necessary to enjoy the fruits of a thriving renewable energy sector: sunshine, strong winds and, in some places, powerful rivers. Indeed, it is predicted that the renewable energy share of total power generation in the Middle East is set to increase to 12 percent by 2035 from only 2 percent in 2010.6 The region has the potential to become one of the world’s largest producers of renewable energy and this could create significant advantages for those countries that seek to capitalise on it.
Electricity generation from solar sources is a particular strength. According to IFC estimates MENA receives between 22 percent and 26 percent of the earth’s total solar energy and solar potential is considered to be exponentially higher than that of all other renewable resources combined. It is even thought to be enough to meet the current global demand for electricity.
Some MENA countries also have potential for developing hydropower resources (Egypt on the Nile River, and Iraq and Syria in the Tigris-Euphrates basin) and wind resources (along the Red Sea and on Morocco’s Atlantic coast). Jordan, for example, imports about 97 percent of fuel for its domestic power needs, so in an effort to increase its energy independence, it is turning to alternative energy. The country aims to produce 600MW of solar power and 1.2GW of wind power by 2020 – that is 10 percent of its energy needs. Jordan has launched a renewable energy programme and opened the decentralised solar market to the residential and commercial markets.
However, rolling out a renewable energy strategy has to make sense for different stakeholders. Governments should be able to present the economic and social benefits and attract private sector money to roll it out. Emerging markets in general have an opportunity to leapfrog the European renewable sector by harnessing and exploiting Europe’s experience, research and development over the last decades and ensure cost efficiency.
MENA governments have been carrying out a lot of preparatory work to enable a transition to renewable energy by defining the appropriate institutional setting; including developing favourable policy and regulatory frameworks to promote the development and use of renewable energy, and to design and empower the required government bodies. One of the challenges is making the transition from an IPP/IWPP procurement model to a smaller- scale, potentially decentralised, non-integrated model.
The effect of the inherent intermittence of renewable energy on grid capacity is often cited as a major challenge to a mass roll-out of the renewables sector across MENA. It is estimated that MENA countries collectively will have to spend over $30 billion from 2015 to 2020 to ensure sufficient grid capacity is available to support the region’s ambitious capacity expansion plans, including renewables. In addition, the region needs to develop mechanisms to support energy balancing, and to implement smart grid systems to ensure that renewable energy can be effectively integrated with conventional sources of power.
Success stories can already be found in the region – Morocco, for example, which was spared from the wave of political insurrections. It has, as a result, managed to retain its stable BBB-8 credit rating and its renewable programme has commenced without major hiccups.
Elsewhere, the Egyptian government has expressed its commitment to solving its power crisis. With a chronic electricity supply shortage, Egypt is in desperate need of additional generation capacity of 13GW to meet soaring domestic power demands over the next five years. The country has set an ambitious goal to install 4.3GW of wind and solar power by 2017, including 2.3GW of solar (2GW of large scale and 300MW of small scale under 500kW) and 2GW of wind. The tender attracted massive interest from both international and local players. Egypt’s New and Renewable Energy Authority (NREA) selected 69 large- scale projects of more than 20MW in 2014 as part of an initial renewable energy tender for 2GW of solar capacity.
But Cairo needs to maintain political stability in order to attract the foreign capital required to implement projects of the size required. In March 2015, a series of multi-billion MoU’s were signed with international firms including British Petroleum, British Gas and Siemens to meet its renewable programmes objectives. Effective execution of these projects is now critical. Should the government continue to provide the right support (for example, providing a bankable framework to reach financial close), Egypt could become one of the leading energy hubs in the MENA region.
Jordan leads the Arab world in utility-scale solar PV installations. After years of delayed tender processes, which pushed back construction dates for the country’s first wind and solar power plants, Jordan passed ground-breaking legislation in 2012 allowing the Ministry of Energy to negotiate directly with international firms. Residential and commercial rooftop sectors are also kick-starting the thriving solar sector. The decentralised residential and commercial solar PV market started with around 40 companies in December 2012 and in 2015 had hundreds of companies working in the field and more than five thousand people are said to be working in the supply chain from design, procurement, electrical, mechanical and civil installation, quality control, safety, commissioning, and operation and maintenance.
Energy storage technologies are also evolving and once they reach operating maturity will have the most impact in this region if solar and wind resources are stored. Further, the significant local consumption of oil rich countries will be alleviated and some of the oil used domestically could be sold at market price.
A PAN-ARAB COMMON ELECTRICITY MARKET: KEY BENEFITS
A common electricity market between the MENA region and the GCC can provide a number of benefits. MENA will be able, for example, to embrace larger projects, export surplus power and gain access to bigger markets, such as Europe. Further, the availability of a common market will provide an opportunity for the establishment of ‘mine mouth’ power plants (that is, plants that are close to the gas reserves or oil resources), similar to projects taking off on the US coast with the Marcellus gas reserves. The cost of generation would also benefit from a common market; there would be fuel cost advantages and the cost of transportation is only incremental. A common market will also allow IPPs or IWPPs to be more strategically located and sized to accommodate the needs of a larger market thus further optimising generation costs.
By far the main benefit of a common market, however, is a more balanced supply of electricity across both the Gulf and MENA, which will optimise both seasonal consumption and peak-time consumption in the likes of Egypt and Saudi Arabia, and more generally in Europe and the Mediterranean basin. A common market will also encourage energy interchange during seasonal diversity when power needs in the GCC region during the hot summer months can be imported from areas where demand is lower.
The development of a regional market via the GCC grid can provide alternative solutions to exporting power on wheels (trucks mainly) rather than by pipeline. The GCC interconnecting grid has been operating since 2009 with trading nearing the equivalent of 800,000MW per hour of energy annually. Further, a unified Gulf Arab electricity grid, allowing the region to share capacity in emergencies, is set for expansion by 2019 with an estimated investment of up to $420 million.
Deutsche Alternative Asset Management believes that the MENA region presents some significant capital investment opportunities in the near to medium term. However, with these opportunities come some great challenges as well for investors. This region will undoubtedly see continued dynamic political, regulatory, social and technological changes for at least another decade. Therefore, it is essential to have strong knowledge of, as well as a long working history in the region as a prerequisite to making an investment. For those foreign investors without a long history in the region, it is highly unlikely this can be done by just placing ‘feet on the ground’. Rather, partnering with experienced local players needs to be seriously considered. Either way, any investor, local or foreign, needs to fully assess these dynamic challenges on a regular basis and invest or divest accordingly.